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The Perils of a Non-ERISA 403(b) Plan

Non-ERISA 403(b) plans seem to be dropping in popularity among non-profit organizations. Given regulatory guidelines that can be difficult to follow, many plan sponsors are finding it harder to maintain a fully compliant non-ERISA plan. If your non-profit still operates a non-ERISA plan, you may want to give some thought to changing over.

Historically, non-ERISA plans were a popular choice for many non-profit organizations, since they were subject to relatively little regulation. In general, most plan sponsors chose to maintain a plan outside of ERISA to avoid Form 5500 reporting and mandatory audits if the plan had more than 100 participants.

To qualify for non-ERISA status, plan sponsors had to have “limited involvement” in the plan. For instance, non-ERISA requirements precluded employers from being involved in certain basic plan functions, such as approval of plan-to-plan transfers, distribution processing, and addressing applicable joint and survivor annuity requirements.

That began to change in 2009 when the Internal Revenue Service implemented new regulations for 403(b) plans. The strategy was to align 403(b) regulations with those used with 401(k) plans. Unfortunately, the new guidelines had many gray areas that made compliance very challenging. For example, a non-ERISA plan that involved the plan sponsor in the disbursement of employee or hardship loans could be considered an ERISA plan.

Under the current regulatory environment, the distinction between a non-ERISA and an ERISA 403(b) is becoming more obscure. Inadvertent or unintentional involvement by the employer can make the plan subject to ERISA. That means that non-profits run the risk of being penalized by the Department of Labor for breach of ERISA requirements. Just having that risk out there creates an unclear, unsure environment.

Limited plan sponsor involvement can also hinder efforts to encourage greater employee plan participation. Every plan sponsor wants as many employees as possible to participate in their retirement plan. The more plan sponsors are involved, the more they can ensure their plans have the features that employees find attractive and will allow them the best opportunity to enhance their financial future.

Changing from a non-ERISA plan to an ERISA plan is not complicated. Generally, organizations need to:
  • commit to incorporating a 403(b) plan into the organization’s retirement plan objective; 
  • determine how the new plan correlates with the existing retirement program; 
  • develop a strategy to create a single 403(b) plan; 
  • develop a request for proposals to find the most suitable vendor to support your overall objective; and 
  • create a coordinated communication plan to bring the 403(b) into the overall organizational retirement objective. 
Consider creating a “combined” retirement benefit statement incorporating your former retirement plan and the new ERISA 403(b) savings plan. This will offer participants complete information about the prior plan as well as the one taking its place. Additionally, do not overlook significant compliance issues when moving from a non-ERISA plan to an ERISA plan:
  • adopt a new plan document (a plan document is already required under current regulations, even for a non-ERISA plan); 
  • understand and plan for an annual audit if the organization has more than 100 employees—this can be coordinated with audits for the current retirement plan; 
  • file an annual return (Form 5500)—this can also be coordinated with existing filings; and 
  • create a process for fiduciary management and oversight. 
The most important value of transitioning from a non-ERISA to an ERISA 403(b) plan is the ability to fully integrate it into an organizational commitment to successful participant outcomes. An advisor who specializes in this area can be of tremendous help in assisting non-profits in navigating the changeover smoothly and successfully.

All not-for-profit organizations should understand the compelling need to take an active role in helping their employees succeed in their retirement. Taking control and responsibility for their 403(b) plan makes for good business and happier employees.

If you have any questions about this article, or would like to begin talking to a dedicated retirement plan advisor, please get in touch by calling (855) 882-9177 or e-mail us at sbs@hanys.org.

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